USDA Foreign Agricultural Service



Required Report - public distribution

Date: 2006/10/27

GAIN Report Number: TW6040

TW0000

Taiwan

Dairy and Products

Annual

2006

Approved by:

Alan Hallman

American Institute in Taiwan

Prepared by:

Jeff Miller, Reports and Marketing Officer

Report Highlights:

U.S. suppliers should see increasing opportunities over the mid-to-long term to expand their share of Taiwan’s dairy market, especially in cheesee, whey and other niche products. The United States remains a minor player in all dairy segments – with the important exception of whey and high value isolates - but has become a more attractive supplier due to increasingly competitive prices and better coordinated marketing and education. Cheese should remain the rising star in the dairy category for several years as mild flavored cheeses continue to be introduced into a wide range of foodservice applications and specialty cheeses gain niche audiences through producer country and retailer promotions. Taiwan consumes approximately 540 thousand metric tons of dairy products, and imports 32% of its supply. Fluid milk imports are expected to remain below the TRQ allowance of 21,298mt.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Taipei ATO [TW2]

[TW]

Executive Summary

The U.S. remains a minor player in Taiwan’s overall dairy market, with most commodity products arriving from Australia and New Zealand, while higher-end and branded products are sourced globally. The U.S. is, however, the major supplier of whey due to competitive pricing and successful promotion efforts into hotel/restaurant/institutional (HRI) and processed food channels by U.S. exporters and the U.S. Dairy Export Council.

Despite annual fluctuations in various categories, such as new to market products such as whey and ingredient fungibles such as powdered milk, continued slow and steady growth in per capita dairy consumption is expected. Dairy product consumption will continue to expand, with consumers becoming more selective, particularly with regard to liquid milk products and specialty dairy items - such as whey and whey protein concentration (WPC) - that add value/differentiation to processed food products already in the market.

The Taiwan dairy industry was established more than four decades ago, during an era when Taiwan emphasized food self-sufficiency and diet diversification. To support production, authorities subsidized it and erected high barriers to imports. Taiwan’s commitment to liberalize the market and permit imports in all dairy categories has defined market trends in recent years. Fluid milk imports are expected to remain below the Tariff Rate Quota (TRQ) allowance of 21,298mt.

Warmer weather in central and southern dairy production regions suppressed milk production in 2005 (by 8.6%) despite a relatively stable herd size. The regular reductions in local production, driven by shrinking dairy cattle numbers due to increasing import pressures following Taiwan’s 2002 WTO accession, is beginning to ease as domestic demand for “fresh” milk is coming into relative parity with domestic production capacity. Future growth in fluid milk imports, and corresponding declines in domestic fluid milk production, will increasingly reflect consumer willingness to substitute UHT / reconstituted milk for fresh (domestic) produce.

Production

Taiwan dairy production bottomed out in 2005, with industry expecting to maintain or slightly increase herd numbers during 2006 and 2007. This reflects the increasing success domestic fluid milk retailers have had in “branding” and promoting domestic milk and in creating fluid milk sub-segments by introducing health-focused additives and promoting certain dairy production areas. The 2005 drop in production of nearly 9%, unlike previous years, is largely attributable to abnormally warm temperatures in production areas. Herd numbers were only slightly smaller. The high comparative costs of production (still estimated as roughly twice that of the US) have already given imported UHT and fluid milk and milk powder a significant share (industry estimates range from 40~60% of production) of the flavored and value-added milk drinks market. Local production is now some eight percent below a previously quoted “natural base” of local production (330K mt), which supports industry comments anticipating that production will hold steady or recover some through the near term.

Increased productivity continues to be realized largely through industry consolidation and better production management practices. Dairy producers receive few government subsidies and are under growing pressure from milk processors to improve business practices and lower costs.

Due to the semi-tropical climate in Taiwan’s dairy regions, output tends to be highest during the cooler winter months (October through March). A 20 percent variation is production between winter and summer months is normal. Unfortunately for local fresh milk producers, consumption patterns for fresh milk run in reverse, with the annual consumption cycle peaking during the hot summer months (see "Marketing & Prices" section below).

Taiwan has 650 registered dairy farms, concentrated principally in the southeast of the island.

The half-dozen or so main processors of consumer-ready fresh milk and liquid milk products (household names such as Uni-President, Kuang Chuan, and Wei Chuan) outsource nearly all of their raw milk production to independent contract farms. Dairy farms directly owned and operated by processors are justified principally by public relations and marketing objectives.

A combination of economics, policies and consumer preference channels nearly all dairy output (nearly 90%) into consumer-ready fresh milk (including flavored milks and yogurt drinks). Of the remainder, local ice cream producers consume approximately 10% of raw milk supplies and producers of milk powder use less than 1%. Dairy products manufactured with local production are consumed domestically. Taiwan produces no other dairy products (cheese, whey, etc.) in commercial quantities.

Consumption

Dairy is now firmly entrenched in the local diet and mild growth can be expected over the coming several years. Fluid milk consumption is forecast to rebound off mild declines seen in recent years and should see 2~4% annual growth during 2006 and 2007. A similarly moderate growth track into the foreseeable future is expected - barring potential negative news related to domestically produced dairy products. This has occurred in the past, with concerns focused on the environmental soundness of domestic dairy production operations and the use of hormones and other non-natural production enhancement measures.

Associated with a healthy and comfortable life-style, dairy products have gained significant market acceptance over the past decade. While the late 1980s saw fresh milk complete its transition from niche food product to standard grocery item, the 1990s saw an unprecedented proliferation in the availability of value-added dairy items including cheeses, yogurt products, dairy spreads, whipped cream, and dairy desserts. The first decade of the 21st century should see increasing acceptance of dairy products in local foods as flavoring atop steamed vegetables, baked with seafood, added to soups, served up in sandwiches, and dolloped over iced coffee.

Over the long term, liquid white milk retail sales are expected to hold steady or grow slightly, while of flavored milk drink and drinking yogurt sales should show declines. The increasing preference for fresh milk and overall decrease in demand for HRI ingredients cut demand for powdered milk. These trends are expected to continue into 2006 and beyond.

Whey, also a newcomer to Taiwan’s food processing industry, seems to be earning acceptance as a cost competitive replacement for other ingredients in processed food applications. Whey’s previously strong growth track has been derailed over the past two years due to supply factors that have limited supply availability and raised costs significantly. The dip in sales during 2004 has turned into a full retreat. Improved supply situation hopes for 2008 should help rekindle interest in whey. Whey is currently viewed as a supplement or replacement for milk and other ingredients. Growing awareness and interest in whey and isolates are largely a result of successful promotion efforts for them as ingredient substitutes and additives. The relatively low per capita consumption of cheese and whey has helped insulate these products from negative economic pressures while encouraging continued expanded use in new products.

Cheese continues to make headway as a "new" product into the broad traditional prepared food market. Cheese sales are expected to continue steaming along at better than 10% growth per year and, by 2008, cheese demand is expected to reach around 23K mt. Cheese promises to continue increasing market volume through growing direct consumption and through innovative applications. It has gradually worked its way from an early position as a "foreign" flavor into a welcome flavor additive for a broad range of processed and fresh-served products. While processed cheeses are still most prevalent, mild-flavored fresh cheeses such as mozzarella, Gouda, and even Parmesan are now increasingly used as flavoring for many traditional and fusion dishes.

Baked cheese dishes, both Western (e.g., lasagna) and Asian/Western fusion (e.g., creamy seafood concoctions), represent an important foodservice trend that continues to remain highly popular. This trend on its own is expected to account for approximately one half of the increase in Taiwan’s consumption of cheese (mozzarella, mild cheddar, gouda, processed) this year.

Market Profile

Despite increasing product diversity, dairy consumption in Taiwan still lags behind other high income Asian economies -- where dairy products already enjoy broad acceptance in local diets. Using benchmark research conducted in 1998, it is estimated that Taiwanese (in 2004) spent US$260 (NT$8,350) per capita on dairy items – representing some 11 kg per person. Japan, a market to which Taiwan frequently looks for consumer and food trends, still consumes more than 3 times this amount per capita of dairy products. This highlights both the relatively shallow level of dairy product penetration in Taiwan and the substantial potential for growth.

Customer Segmentation

The dairy products market is segmented into two major consumer groups. The first group buys and consumes dairy products such as milk, cheese, and yogurt based for nutritional and health reasons. The second buys dairy products based on quality perceptions, status considerations, and/or curiosity. These two groups have different expectations regarding dairy products and may best be approached differently in terms of marketing and sales work.

· The Nutrition-Focused Consumer

Taiwan consumers appreciate the nutritional benefits of consuming dairy products. The relatively limited product expectations, beyond nutrition, of nutrition-focused consumers make this group highly influenced by price and convenience when making purchase decisions. Children are the largest nutrition-focused consumer segment for dairy items such as processed cheese, yogurt drinks, fresh milk, powdered milk, and puddings. The elderly are prime consumers of nutritionally enhanced milk powders.

· The Quality Buyer

With a large (often Western-educated) middle class, high average income level, and a desire to become more cosmopolitan, urban Taiwan has increasingly embraced Western cuisine and food trends. Dairy products are an important component of this trend. Middle and upper class consumers tend to make food (including dairy product) purchase decisions based upon factors beyond cost and convenience. These include product and packaging appearance, quality and taste perceptions, recommendations from others, features or recipe write-ups in the news media, and so on. Also, a significant percentage of chefs now in the better Western restaurants and hotels are trained abroad – often in Europe. They specify high-quality ingredients and brand names with which they are familiar when preparing food. Some of the better bakery chains as well also employ master bakers trained abroad.

Trade

Of the approximate total of 540,000 metric tons of dairy products consumed on the island, 32% (175k mt) is imported. In the coming 5 years, imports may well reach a 40% or slightly higher share of the market. However, growth prospects rely largely on the acceptance of imported liquid milk in the market, which, by necessity, primarily arrives in UHT format, considered by most Taiwan consumers to be of lower quality and poorer taste than domestically produced fresh fluid milk.

Highly competitive prices and long-running coordinated promotion by dairy suppliers from major exporting nations such as New Zealand and Australia in commodity categories and comparatively good prices and terms offered by many suppliers of higher end dairy products from Europe have generally made the going tough for U.S. suppliers who are often able to get better prices (particularly for commodity dairy products) in their home market. U.S. suppliers are not expected to gain significant ground in the general dairy market given current supply conditions. However, given recent reported instability in supply from Europe, rising overall prices, and changing conditions in the U.S. with respect to dairy prices, U.S. suppliers should experience growing opportunities in particular product areas, such as cheese and whey.

The current structure of trade for major commodity categories, such as fluid and powdered milk, should be little affected by lower dollar-denominated prices due to the weaker U.S. dollar. Importers are, however, giving greater attention to U.S. cheese suppliers (and other

important niche categories, such as ice cream, whey, and dairy ingredients) due to increasingly attractive U.S. supplier prices.

Tariff Rate Quota (TRQ) Administration: Taiwan’s 21,298mt annual TRQ for fluid milk represents the final increase in that TRQ required by Taiwan’s World Trade Organization (WTO) accession agreement. Taiwan administers TRQs under “System 2” rules, under which import rights are auctioned once a year. All importers and exporters registered with Taiwan’s Board of Foreign Trade (BOFT) are eligible to bid on quota rights. There are no performance bonds and quota rights go to the highest bidder. For liquid milk, the minimum lot size is 250 mt, with a maximum of 4,259mt. With imported fresh milk still a “new to market” product, selling either in less marketable UHT formats or (for fresh) at around 20% premiums, Taiwan’s fluid milk import volumes will likely remain in the 10~15,000mt range through the foreseeable future.

Special Safeguard (SSG) Protection: WTO rules also allow Taiwan to impose an additional SSG assessment, above and beyond any tariff bindings on imports of most fluid dairy products. This can occur either when either the CIF price of an item falls below a benchmark floor price (based on a 1990-1992 historical domestic "farm gate" price) or when total import volumes exceed a certain trigger level (based on recent import volumes). Taiwan has already notified the WTO of its intention to impose SSG’s although it has not said when it may act (volumes / price do not yet justify). The SSG would add 33 percent to tariff bindings (e.g., a 10 percent duty would rise to 13 percent). Imports under TRQ are not subject to special safeguards.

Products Affected by SSGs (by HS Code)

|HS Code |Description |

|04011000 / 2000 / 3000|Fresh and Longlife Milk (excluding that of goats & sheep) |

|04029910 |Fresh milk containing sugar or other sweeteners |

|04029920 |Evaporated or sterilized milk, containing sugar or other sweeteners |

|04029990 |Other milk, containing sugar or other sweeteners |

|04039090 |Other buttermilk (not fresh, not condensed, not dry) * |

|04039090 |Various minor categories of modified, flavored, or fermented milk and cream * |

|040390901 |Curdled milk |

* note: Yogurt; fresh, dried, & condensed buttermilk; sour cream; fermented sour milk; and yeast / fermented milk powders are not eligible for SSG protection.

The U.S. is a major producer and exporter of whey and whey protein concentrate and other extracts and so enjoys a competitive advantage in these niches. The success of initial promotion efforts targeting food processors indicates strong potential for whey as an ingredient in Taiwan’s large food processing industry. Strong demand growth is projected through the foreseeable future.

At present, Taiwan permits most value-added milk products onto the island subject to payment of tariffs and compliance with sanitary requirements. Infant milk formulas, however must be approved by the Department of Health.

Dairy and the WTO

Taiwan acceded to the World Trade Organization (WTO) on January 1, 2002. In addition to reduction in tariffs for most dairy products, Taiwan now operates a process to allocate import quotas for products entering under TRQs.

In general, the bulk of gains from tariff reductions and greater market access for imports should be passed directly to consumers through lower prices and increased product selection.

Import Tariffs for Dairy Products

|Tariff Schedule |Description |Tariff |

|various (under 0401) |Fresh & longlife cow milk & cream, unsweetened w/ fat 6% |15 / TRQ |

|various (under 0401) |Fresh & longlife goat / sheep milk & cream, unsweetened |20 |

|various (under 0402) |Cow/goat/sheep milk in powder, granule, or block form for human consumption |12 |

|04029110 |Condensed milk, unsweetened |20 |

|04029120 |Evaporated or sterilized milk, unsweetened |20 |

|04029190 |"other" milk or cream, unsweetened |20 |

|04029910 |fresh or condensed milk, sweetened |50 / TRQ |

|04029920 |evaporated or sterilized milk, sweetened |15 / TRQ |

|04029990 |milk or cream, neither concentrated nor condensed, sweetened |24 |

|04039010 |buttermilk, dry powder |12 |

|04031000 |Yoghurt |15 |

|04039090 |buttermilk, sour milk, fermented milk |20 |

|04039090924 |buttermilk, n.e.s. (liquid, concentrated, evaporated) |15 / TRQ |

|04039090942 |curdled milk or cream, kephir, other fermented or oracified milk or cream n.e.s. |15 / TRQ |

|04041090 |whey & modified whey, whether concentrated or not |5 |

|04049000 |other products containing milk or milk constituents |27.5 |

|04050010 |Butter |5 |

|04059010 |de-watered milkfat |8 |

|04061000 |fresh cheese, including whey cheese and curd |5 |

|04062 / 3 / 4000 |grated / powdered cheese, processed cheese, blue-veined cheese |5 |

|18069010 |ice cream powder |5 |

|19011000 |infant milk powder, retail packaged |5 |

|19019023 |evaporated or sterilized milk, prepared |25 |

|19019027 |flavored milk |15 / TRQ |

|21050010 |ice cream |10 |

|35029000 |Whey Protein Concentrate |5 |

· Tariff Rate Quota (TRQ) indicates that product is permitted under a "normal" tariff up to a certain annual quota volume, at which point a "prohibitive" tariff will be administered on any additional imported quantities.

· All tariffs noted are "final" WTO tariffs.

Competition

At present, U.S. products and brands are relatively well represented only in the ice cream and infant formula segments. Key European, Australasian, and Japanese brands that have sold into the market for many years have much higher brand recognition. To gain market share, U.S. suppliers will need to increase consumer awareness.

The potential of China to supply competitive milk and dairy products into the market is small through the foreseeable future. WTO terms anticipate that member states permit all WTO members equal access, subject to phytosanitary, safety, and other requirements. The political freeze across the Taiwan Strait poses formidable problems for traders seeking to resolve technical issues, which will seriously impede trade. While unlikely to pose a threat to higher value-added product segments, continuing investment flows into China from Taiwan may eventually help develop the former as an effective exporter to Taiwan.

In May 2003, Taiwan announced the lifting of import restrictions for one value-added dairy product from China, sweetened condensed milk (HS Code 0402-9940-008). The opening of this category to importation provides Taiwanese suppliers an initial opportunity to evaluate Mainland Chinese value-added dairy products, with the potential for the opening of further value-added categories in the coming years. Initial imports of sweetened condensed milk from China totaled 488mt (83% of total supply) in 2004, which rose by 12% in 2005 to 551mt (84% of total supply). Due to relatively stable year-to-year demand for products in this category, further growth potential for Chinese imports is limited. The US does not currently provide competing products in the sweetened condensed milk category.

MARKETING & PRICES

Marketing

Dairy has a limited history in Taiwan’s diet. Therefore, market demand for and perceptions regarding dairy products are grounded in marketing messages and other information received from dairy producing countries and suppliers.

Two elements that have proven successful for exporters of dairy products to Taiwan include:

· Actively Support Importer / Distributor Initiatives

For Taiwan distributors of dairy products, effective public relations and active consumer promotion are considered critical to marketing and sales success. Therefore, U.S. suppliers are encouraged to develop a responsive and supportive relationship with importers and distributors to ensure product messages and information are delivered effectively to target consumers.

U.S. suppliers have expanded sales of ice cream, infant formula, and processed cheese largely by supporting the development of product image and customer loyalty. A major U.S. ice cream brand is promoted as a premium product and maintains a strong public relations program by targeting the media and retailers. One U.S. infant formula retailer promotes a comprehensive "mother care" program for expecting and new mothers and retains a consulting staff of doctors and nutritionists for public relations and promotional work. U.S. suppliers of processed cheeses have successfully plugged into Taiwan’s fast food industry by leveraging existing supplier relationships with parent franchises in the United States (such as Pizza Hut, Dominos, Burger King, and McDonald’s).

Mozzarella and mild cheddars have increasingly found a secure niche in the rapidly growing market for hot-served baked pasta and rice meals. Mild cheeses are increasingly being used and promoted as shredded toppings on baked Italian and innovative fusion Asian dishes.

· Tailor Product Offering to Customer Tastes and Preferences

In Taiwan, processed cheese is widely accepted as a "nutritional supplement" and is often consumed on for perceived health benefits. To service this important market segment, suppliers such as Cheesedale (Australia) and Anchor (New Zealand) have introduced processed cheese slices enhanced with garlic, pineapple, smoked, and other flavors. Several Japanese brands go farther – marketing delicately packaged and highly priced processed cheese products in such flavors as seaweed, fish, and green mustard (wasabi). While sales of such Japanese products are relatively small, their attractive packaging and unique flavors support retail prices (by weight) of 2~5 times that of "ordinary" processed cheese.

Smaller size packaging for products requiring refrigeration is still preferred because of the limited capacity of home refrigerators.

Taiwan’s relatively advanced food processing and baking industries should be targeted for dairy ingredient sales, particularly in high value categories such as whey, whey protein concentrate, and other milk derivatives and neutraceuticals.

Prices

Milk’s position as a "warm weather" beverage in the minds of many consumers results in sharply high consumption during the summer months. Discounting and promotions are heavily used both to maximize sales volume during peak consumption months and spur slow winter sales. During the winter, which runs from approximately November through April, discounting can cut up to 50% off retail prices.

Grocery stores and hypermarkets frequently make special offers on dairy products. Products are often bundled together and offered at a single, often discounted, price. Such bundling may include two or more of the same item (of equal or different sizes), two or more different products (milk packaged together with soy milk), or a promotional item (e.g., stickers with processed cheese or plastic tumbler with powdered milk).

Convenience stores rarely offer bundled products and only infrequently discount retail prices for their dairy products.

STATISTICS

Fluid Milk

Whole, Powdered

Non-Fat, Powdered

Whey

Cheese

Butter

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Global Agriculture Information Network

USDA Foreign Agricultural Service

GAIN Report

Template Version 2.07

* Due to chart space restrictions, three categories which experienced exceptionally high growth during the survey period, sweetened condensed / evaporated milk (77.8x), ice cream powder (3.1x) and fluid milk (4.8x), have not been included.

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